“Collective failure” – the aftermath of the 2022 catastrophic floods
Four catastrophic flood events occurred in 2022, resulting in devastating loss of life, as well as property damage. There were more than 305,000 claims and $7.7 billion in insured losses. The February/March floods that impacted South-East Queensland and northern New South Wales have taken up the dubious mantle of being the costliest natural disaster in Australia’s history, with insured losses topping $6.3 billion across 243,000 claims, according to the Insurance Council of Australia (ICA).
The flood events during the year were unprecedented in terms of the scale of the losses and the number of people impacted. Given the scale and extent of the catastrophes, it was almost inevitable that there would be some issues with the way insurance claims were handled. Although 99% of claims have been closed, the Australian Securities and Investments Commission (ASIC) notes that the near 1% still outstanding equates to more than 1,800 claims.
Flood Failure to Future Fairness
In 2023, the House of Representatives Standing Committee on Economics commenced an inquiry into insurers’ responses to the 2022 major floods.
The findings of the inquiry were released in October 2024. It was found that too many cases were mishandled, and inconsistent decision-making meant neighbours received different outcomes after the same event.
Chair of the inquiry, Daniel Mulino MP, said the title of the report reflects “the collective failure by insurers to meet their obligations to policyholders” in 2022 and it is hoped the report’s recommendations will deliver a fairer system.
86 recommendations for improvement made
The Flood Failure to Future Fairness report makes 86 recommendations aimed at further improving the insurance industry’s response to natural disasters and enhancing consumer protections.
The recommendations cover areas within the responsibility of insurers, including use of expert reports, cash settlements, temporary accommodation, and communications. There are also calls for new legislation, changes to the General Insurance Code of Practice, the introduction of standard hazard terms, addressing mitigation, and some government intervention including a “government-supported reinsurance arrangement” for high-risk properties.
The Standing Committee has recommended reforms to ensure “the negative impacts of the next flood event or natural disaster are not further compounded by insurers’ poor claims and complaints handling”.
“The Australian insurance industry must be able to properly support policyholders in times of crisis, even where that disaster is catastrophic in scale,” the report states. “The recommendations will also provide guidance for governments to address the lack of support for homeowners in flood-prone areas, given the emerging issue of flood insurance accessibility and affordability.”
Dr Mulino said the recommendations can be divided into four broad groups:
- How insurers can improve operational practices and protocols.
- Strengthening the code of practice.
- Regulatory arrangements, such as standard definitions and the data gathering and publication powers of ASIC.
- Government intervention in the industry, for example to improve insurance affordability.
The report notes that the implementation of the recommendations “will lead to better claims management, more transparent reporting of insurer performance, lower premiums for households exposed to a high risk of flooding and improved long-term strategies for flood preparation and resilience.”
Dr Mulino notes that implementing the recommendations would put downward pressure on premiums as some of the recommendations would bring claims handling efficiencies, while a greater focus on linking household mitigation and insurance would reduce pricing.
The report also supports household- and community-level resilience projects, improved land use planning, and ending state and territory taxes on insurance cover.
Three ‘P’s of flood insurance
The report examines the three ‘P’s of flood insurance: policyholders, pooling and preparation. Namely:
- Policyholders need to be treated better.
- Pooling mechanisms need to be strengthened.
- Preparation needs to be given more priority.
Policyholders
“Policyholders have a right to expect the timely and fair consideration of their claims. While many cases arising from the 2022 floods were handled well, too many were badly mishandled by insurers,” states the report.
The recommendations aim to improve the efficiency and fairness of insurers when they deal with policyholders.
Pre-existing damage disputes were a “fundamental issue” with poor quality expert reports often to blame. To address this, it is recommended that clearer regulatory guidance is provided in relation to the preparation of expert reports where these impact on the decision as to whether to grant a claim, including hydrology reports and technical building reports.
Following the ASIC and Deloitte reports of 2022 which found that improvements were needed in communication, claims management, dispute resolution, and the management of cash settlements, insurers pointed out improvements in their training and IT systems. However, “more work is needed”. In particular, “more transparency is required in relation to the effectiveness of measures undertaken by insurers”. The report recommends new arrangements for the robust reporting of claims handling data to regulators and the publication of this data to hold insurers to account.
Several recommendations relate to the General Insurance Code of Practice and suggest the Code needs to be strengthened as a priority. It was recommended that the ICA register the Code with ASIC for approval, and that the Code become a contractually enforceable element of the policyholder’s insurance contract.
It was also recommended that key terms be standardised across all insurance contracts, including in relation to non-flood forms of water damage, ‘wear and tear’ and ‘lack of maintenance’.
Given how many claims were rejected on the basis of insufficient maintenance, it has been recommended that insurers be required to provide guidance to policyholders in relation to maintenance obligations for key aspects of a residential building.
Pooling
The report identified several areas where pooling (whereby premiums are pooled so as to be distributed to those adversely affected) is either currently not functioning as well as it should or where it is under threat.
In some situations after a natural catastrophe, too much risk is put on the policyholder. One example relates to temporary accommodation. Many policies have a six-month or 12-month limit on temporary accommodation, which often falls short of the actual time it takes to complete the rebuild. In some policies, the cost of temporary accommodation comes out of the sum insured, leaving a considerable amount of risk with households not well-placed to manage it. These are instances where risk is not being sufficiently pooled. It is recommended that insurers assume the risk of the length of time taken to complete works and to manage and bear the cost of temporary accommodation.
Another area where policyholders face considerable risk is where the pre-existing condition of a material aspect of the building is unobservable, for example stumps. The Committee recognises that insurers should not assume the risk of all pre-existing damage as this would be inefficient and lead to higher premiums. However, it is recommended that insurers take on responsibility for tightly definable risks such as stumps, providing better pooling and reducing the level of risk being placed on households.
Insurers’ granular data (which is highly detailed data that enables a comprehensive view of the subject matter) has identified very high-risk properties and is undermining pooling. The result is these high-risks are being priced out of the insurance market. The Committee recommends government intervention, including the continuation of community-level and household-level mitigation, and all three levels of government stopping new developments in high-risk areas.
Preparation
“The best way to reduce premiums is to reduce the underlying risk,” the report states.
The report notes the government should consider measures to improve the affordability of flood insurance for policyholders with high-risk properties, including the “appropriateness of government-supported reinsurance arrangements”, tied to mitigation. Any such “reinsurance pool or subsidies should be phased out over time in line with ongoing investment in community and household mitigation to reduce the underlying risk”.
The government should also continue to commit at least $200 million a year for community-level mitigation through the Disaster Ready Fund.
A range of property-level mitigation measures should also be considered, including house buybacks, and investments in resilience, such as house raisings.
In addition to more mitigation at the community and household level, the Committee says the government needs to stop the building of more homes and businesses in high-risk areas.
The Committee also called for the states and territories to remove insurance taxes.
Industry response
The insurance industry has backed the flood inquiry reforms and pledged action.
“The ICA strongly supports those recommendations which would put downward pressure on premiums and help safeguard communities from future extreme weather events. These include the removal of state insurance taxes, ongoing government investment in resilience and mitigation, and changes to planning arrangements to stop development on floodplains,” the ICA said in a statement.
The Australian and New Zealand Institute of Insurance and Finance (ANZIIF) also backed the Committee’s recommendations. ANZIIF praised the report for its focus on improving outcomes for policyholders and noted that ANZIIF is committed to supporting the industry through education and training initiatives.
Several insurance companies also responded positively to the report and recommendations. For example, IAG described the inquiry as a valuable opportunity to learn from the challenges of 2022 and strengthen the company’s ability to handle future severe weather events.
Property in flood-prone zones
If you own property in a flood-prone zone, be sure to prepare for flood events. Actions may include:
- Ensure drains are free from debris and not covered over.
- Direct water to drain away from all sides of the property.
- Check any paving running alongside the property drains water away from, not towards, the walls.
- Ensure garden beds aren’t built up high against the outside wall above the damp-proof course.
- Avoid storing chemicals and poisons at ground-level.
- Consider alternatives to carpet floor coverings.
- Use resilient materials (i.e. materials that won’t disintegrate or go mouldy after a flood).
- Raise power points and air-conditioning units (if possible) above predicted flood level height.
- Consider planting, landscaping or building structures around the property to deflect water, improve drainage and protect the property against landslides.
- Where possible, consider raising the house or building.
- Retrofit the property (e.g. wet-proofing, dry-proofing and absorption methods).
- Have a supply of sandbags at the property.
You should also talk to your EBM Account Manager about flood cover for your property (business and/or home).
